MultiFamily Market Outlook - 02/26/2007 (Plain Text Version)

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In this issue:
Quarterly Update: Rents Up, Condo Absorption Surprisingly Strong
Year Ends with a Surge in Multifamily Starts
Real Rents Remain High, with Slight Year-End Drop
A Steady Economy, with Low Inflation, Low Interest Rates
Multifamily Stocks Again Show Record Performance

A Steady Economy, with Low Inflation, Low Interest Rates

In general, the U.S. economy is performing well, with growth in real Gross Domestic Product (GDP) holding up in recent quarters even though the housing production component of GDP has contracted substantially. The economy did not even skate close to a recession in 2006, and the probability of an economic downturn is not high over the 2007-2008 forecast period. The labor market has been resilient. Although the downswing in housing production undoubtedly caused job losses in residential construction during 2006, overall job growth was solid during the year, and NAHB is expecting solid job growth in 2007 as well. While the labor market was performing relatively well, core consumer price inflation (excluding food and energy) moved well above the Federal Reserve's "tolerance zones" during 2006. However, core inflation rates began to recede as 2006 drew to a close (at least on a year-over-year basis).

The slowdown in core inflation actually had been projected by the Federal Reserve, and this Fed projection is an integral part of NAHB's economic forecast for 2007 and 2008. The Fed held monetary policy steady at both the January and February meetings of the Federal Open Market Committee (FOMC). Indeed, the Fed has held its federal funds target rate at 5.25% since mid-2006. NAHB expects the Fed to maintain this funds rate target until the late-June FOMC meeting, and for the Fed to cut the rate by a quarter point at that time—primarily in order to keep the "real" rate from rising as core inflation recedes. Meanwhile, long-term rates firmed up in January, as incoming data on the economy were surprisingly strong.

Even so, long-term rates remain quite low on an historical basis, as well as significantly below the recent high points reached in mid-2006. Despite the recent firming of long-term rates, the Treasury yield curve still is inverted across much of its range, and that may not be sustainable for much longer. NAHB's economic forecast calls for an essentially flat yield curve by late 2007 (at least from short term rates out to the 10-year Treasury), as short-term rates recede and long-term rates move up from their current levels.